Risk

In: Business and Management

Submitted By ssdewi83
Words 311
Pages 2
1. Imagine you are Bill. How would you explain to Mary the relationship between risk and return of individual stocks?

If I were Bill, I would explain to Mary that the relationship between risk and return is simply the additional compensation for bearing risk. If she were to invest in more risky securities, the return may be higher, but if the market falls, her losses could also be quite large. With risky assets, the possibility of it losing value is also greater, compared to a risk-free or low-risk asset. As Mary is described to be a ‘conservative and cautious’ person, she would need to move out of risky assets and invest in lower-risk securities. In order to have a guaranteed expected return, she must invest in securities or assets that are low-risk but would not have as big of a return

2. Mary has no idea what Beta means and how it is related to the required return of her stocks. Explain how you would help her understand these concepts.
The Beta is an indication of the amount of systematic risk present in a risky investment, compared to an average risky asset. The beta only represents systematic risk, as unsystematic risk can be diversified enough that it does not exist. An asset with a beta of 1 means that it is of average risk compared to the market. Essentially, the beta of a particular asset will tell you how the stock will perform if the market were to change. If the asset Mary is holding as a beta of 2, and the market dropped by 20%, that particular risky asset with a beta of 2 will drop by 40%. Securities with high beta will have high volatility. Assets with a beta of less than 1 indicate that these are very low-risk or risk-free…...

Similar Documents

Risk

...Systematic Risks (non-diversifiable) Systematic risks are risks that affect the entire market and not each single corporation; it is associated with the overall movement in the general market or economic. Systematic risk are also called as market risk, are non-diversifiable. According to Berk, DeMarzo and Harford (2012,p.337), systematic risks are risks that fluctuate through the market available news. These risks are difficult to be diversified even though the shareholder holds a portfolio since these risks affect the whole market. Systematic risks are included interest rate risk, inflation rate risk, market risk and exchange rate risk, recession, political risk, earthquake. Unsystematic Risks (diversifiable) Unsystematic risks are not affected by the economy but by the specific corporation. The fluctuation of share price of a particular corporation is due to the good or bad news announced by the corporation. It will increase when the corporation that had less earnings growth rate, and low morale or productivity of employees or a poor reputation of the corporation, vice versa. However, unsystematic risk can be diversified by shareholders who hold the portfolio when the stocks are negatively co-related. In fact, it means that when a particular event occurs that affects a specific corporation, the stock of other corporation will be unaffected and thus, the fluctuation of share price between two stocks can be offset. Unsystematic risks are included liquidity risk,......

Words: 1005 - Pages: 5

Risk

...Leverage Risk Leverage means that debt is combined with equity to purchase assets. A highly leveraged bank is a bank with high amounts of debt relative to equity capital. Because debt requires future payments for the issuer, a highly leveraged bank is less able to withstand unexpected shocks to its balance sheet. In short, a highly leveraged bank is more risky than a less leveraged one. The most straightforward measure of leverage risk is the ratio of equity capital to total assets, known as the leverage ratio. In table 12.4 the line just above the total shows the leverage ratio for the banking industry as a whole masks considerable differences in leverage across banks. In the 1980s the leverage ratio for large banks was much lower than for small banks. This concerned regulators both in the United States and other countries who imposed risk-based capital (RBC) requirements in the early 1990s. The result of these requirements is that banks deemed more risky are required to maintain less leverage. Credit risk Credit risk arises because some bank borrowers may not be able to pay back their loans. Moreover, many of these loans are made to borrowers whose risk is difficult to assess and whose performance is difficult to monitor. That is, they are loans characterized by the asymmetric information problems of adverse selection and moral hazard, discussed in the previous information about these borrowers and structure their loans appropriately. In particular, the riskier loans...

Words: 1002 - Pages: 5

Risk

...INTRODUCTION Risk is a state in which losses are possible. You are surrounded by innumerable risks from birth to death. They are pervasive as the air we breathe. Air itself even involves risk because its pollutants can cause unpredictable illnesses that in turn can cause loss to both your ability to earn income by working and enjoy life in its fullest. Risk also exists when part of your family or business income can be wiped out by death or disability. Likewise, assets can be destroyed by earthquake, flood, fire, tornado, being held legally liable for damage to someone else and a host of other causes of loss. UNDERSTANDING OF RISK Risk may be considered from a number of different viewpoints that can be argued to form a continuum ranging from a very narrow view to a much broader understanding of the nature of risk. At the narrow or quantitative end of the scale is the view held mainly by engineers. This approach takes the stance that risk is represented by the quantitative measure of the probability of an untoward/unpleasant event occurring. Economists tend to view risk differently. Again probability theory is used but it is applied to all possible outcomes arising out of a particular event. By multiplying the probability by the outcome an expected loss is produced. When all outcomes are multiplied by their respective probabilities a probability distribution is produced. Various means are used to measure the outcome of an event. The cost of the outcome in monetary terms...

Words: 595 - Pages: 3

Risk

...Grading Rubric for Paper #1 Category Points % Description Cover Page 5 5% Cover page Documentation & Formatting 10 10% Supporting documentation and formatting of paper Works Cited 10 10% Accuracy of citations and works cited section Introduction / Conclusion 10 10% Clarity of Introduction and Conclusions Organization & Cohesiveness 10 10% Organization of paper Flow of paper 15 15% How well did the topics flow together and how well did the elements of risk interlock together Content 40 40% Content of the identification, monitored and ranking of all risks for the project Total 100 100% A quality paper will meet or exceed all of the above requirements. Best Practices • Cover Page - Include who you prepared the paper for, who prepared, and date. • Introduction - Use a header on your paper. This will indicate you are introducing your paper. The purpose of an introduction or opening: 1. Introduce the subject and why the subject is important. 2. Preview the main ideas and the order in which they will be covered. 3. Establish a tone of the document. Include in the introduction a reason for the audience to read the paper. Also, include an overview of what you are going to cover in your paper and the importance of the material. (This should include or introduce the questions you are asked to answer on each assignment.) • Body of Your Report - Use a header titled with the name of your project. Example: “The Development of Hotel X - A World Class......

Words: 458 - Pages: 2

Risk

...Risk interaction for a stockbroker firm Overview The following system depicts the interaction of the components of a stockbroker firm in perspective of its revenues, profits, and outlook for economical development, all of them being influenced by the element of risk (depicted in the system by volatility and risk of costumer willing to take). The main product to be analyzed in our system interaction is stocks which is the main source of profit for a stockbroker firm. The selling of this product to different costumers around the world generates fees every time a stock or a security is traded at stockbroker firm. The more trading the firm has the higher the revenues of the firm as fees are generated every time there is a customer trading stocks. Interaction and components The first loop labeled as loop A consist of the primary function system of the stockbroker firm. The components and its functions create a reinforced loop as all its components reinforce the next one to bring a higher or lower outcome. For instance, the more stock selling the stockbroker firm deals with, the more fees it is able to generate which consequently gives higher revenues and profits to the firm. When a company has a good track record of revenues and profits it seeks to make it grow and have a bigger market share. This consequently gives a better reputation of the firm and finally an increase in the selling of its product which reinforces the loop. It is important to note that if the outlook is......

Words: 1291 - Pages: 6

Risk

...Credit Risk Management Ken Brown Peter Moles CR-A2-engb 1/2012 (1044) This course text is part of the learning content for this Edinburgh Business School course. In addition to this printed course text, you should also have access to the course website in this subject, which will provide you with more learning content, the Profiler software and past examination questions and answers. The content of this course text is updated from time to time, and all changes are reflected in the version of the text that appears on the accompanying website at http://coursewebsites.ebsglobal.net/. Most updates are minor, and examination questions will avoid any new or significantly altered material for two years following publication of the relevant material on the website. You can check the version of the course text via the version release number to be found on the front page of the text, and compare this to the version number of the latest PDF version of the text on the website. If you are studying this course as part of a tutored programme, you should contact your Centre for further information on any changes. Full terms and conditions that apply to students on any of the Edinburgh Business School courses are available on the website www.ebsglobal.net, and should have been notified to you either by Edinburgh Business School or by the centre or regional partner through whom you purchased your course. If this is not the case, please contact Edinburgh Business School at the address......

Words: 21029 - Pages: 85

Risk

...T e c h n i c a l n o T e s a n d M a n u a l s Operational Risk Management and Business Continuity Planning for Modern State Treasuries Ian Storkey Fiscal Affairs Department I N T e r N A T I o N A l M o N e T A r y F U N D INTerNATIoNAl MoNeTAry FUND Fiscal Affairs Department Operational Risk Management and Business Continuity Planning for Modern State Treasuries Prepared by Ian Storkey Authorized for distribution by Sanjeev Gupta November 2011 DISCLAIMER: This Technical Guidance Note should not be reported as representing the views of the IMF. The views expressed in this Note are those of the authors and do not necessarily represent those of the IMF or IMF policy. JEL Classification Numbers: Keywords: H12, H60, H63, H83 business continuity, disaster recovery, business continuity and disaster recovery plan, operational risk, operational risk management, treasury operations ian@storkeyandco.com Author’s E-Mail Address: TECHNICAL NoTEs ANd MANUALs Operational Risk Management and Business Continuity Planning for Modern State Treasuries Prepared by Ian Storkey This technical note and manual (TNM)1 addresses the following main issues: • What is operational risk management and how this should be applied to treasury operations. • What is business continuity and disaster recovery planning and why it is important for treasury operations. • How to develop and implement a business continuity and disaster recovery plan using a six......

Words: 10882 - Pages: 44

Risk

...A bit of wisdom attributed to the English poet Chaucer says, “nothing ventured, nothing gained.” Financial markets give us ample evidence that Chaucer knew what he was talk- ing about. Over time, high-risk investments tend to earn higher returns than do low-risk investments. When managers invest corporate funds, or when individuals decide how to allocate their money between different types of investments, they must weigh the trade-off between risk and return. The purpose of the next four chapters is to explore that trade-off in depth. We begin in Chapters 4 and 5 by describing two of the most common types of investments available in the market—bonds and stocks. The bond market is vast, and it plays an extremely important role in the economy. Federal, state, and local governments issue bonds to finance all kinds of public works projects and to cover budget deficits. Corporations sell bonds to raise funds to meet daily operating needs and to pay for major investments. Chapter 4 describes the basic bond features and explains how investors value bonds. Chapter 5 examines the stock market. Valuing stocks is more complex than valuing bonds because stocks do not promise fixed payment streams as do bonds. Therefore, Chapter 5 discusses methods that investors and analysts use to estimate stock values. The chapter also provides a brief explanation of how firms work with investment bank- ers to sell stock to the public and how investors can trade shares of...

Words: 420 - Pages: 2

Risk

...HB 436:2004 Handbook Risk Management Guidelines Companion to AS/NZS 4360:2004 Originated as HB 142—1999 and HB 143:1999. Jointly revised and redesignated as HB 436:2004. COPYRIGHT © Standards Australia/Standards New Zealand All rights are reserved. No part of this work may be reproduced or copied in any form or by any means, electronic or mechanical, including photocopying, without the written permission of the publisher. Jointly published by Standards Australia International Ltd, GPO Box 5420, Sydney, NSW 2001 and Standards New Zealand, Private Bag 2439, Wellington 6020 ISBN 0 7337 5960 2 Preface This Handbook provides generic guidance for establishing and implementing effective risk management processes in any organization. It demonstrates how to establish the proper context, and then how to identify, analyse, evaluate, treat, communicate and monitor risks. This Handbook is based on the Joint Australian/New Zealand Standard, AS/NZS 4360:2004, Risk management (the Standard). Each Section contains an extract from the Standard, followed by practical advice and relevant examples. This basic guide provides a generic framework for managing risk. It may be applied in a very wide range of organizations including: • public sector entities at national, regional and local levels; • commercial enterprises, including companies, joint ventures, firms and franchises; • partnerships and sole practices; • non-government organizations; and • voluntary organizations such as......

Words: 28887 - Pages: 116

Risk

...2 Question 1. Imagine you are Bill. How would you explain to Mary the relationship between risk and return of Individual Stocks? A portfolio’s risk consists of systematic risk and unsystematic risk. The unsystematic risk can be virtually eliminated thorugh the effects of diversification. It is the systematic risk that causes investors to require a risk premium. Systematic risk reflects market-wide factors such as the country's rate of economic growth, corporate tax rates, interest rates etc. Since these market-wide factors generally cause returns to move in the same direction they cannot cancel out. Therefore, systematic risk remains present in all portfolios. Some investments will be more sensitive to market factors than others and will therefore have a higher systematic risk. Empirical theory suggests a positive correlation between risk and return. It holds true because a higher risk taken by an investor is translated to into a higher risk premium i.e. Market return less the risk free rate. Therefore, it can be concluded that an investor would prefer higher returns for an investment that has higher risk attached to it compared to other similar securities. Question 2. Mary has no idea what beta means and how it is related to the required return of the stocks. Explain how would you help her understand these concepts? Beta is an index of systematic risk. It measures the risk of a particular security relative to the market portfolio. If a stock has a beta of 2, then......

Words: 2684 - Pages: 11

Risk

...CEO Toolkit n GLOBAL CEO n January 2003 A CEO’s guide to value at risk models Ravi Madapati* Value at Risk (VaR) models are being used extensively in the world of risk management. VaR provides an upper bound on the potential loss due to adverse market fluctuations. VaR can be used to estimate risk in the case of various financial instruments including bonds, equities and derivatives. S ince the past decade or so no other tool in financial risk management has been heard about as much as Value at Risk (VaR) modeling. VaR has rapidly become the industry standard for measuring and reporting market risk in trading portfolios of banks and other trading institutions. VaR provides an upper bound on the potential loss due to adverse market fluctuations. Any VaR number has to specify which portfolio is being considered (e.g., Equity derivatives book), the confidence level (e.g., 97.5%) and the holding period (e.g., 10 days). VaR objectively tries to combine the sensitivity of the portfolio to market changes and the probability of a given market change. VaR has been adopted by the Basel Committee to set the standard for the minimum amount of capital to be held against the market risks. VaR can be used to estimate risk in the case of various financial instruments including bonds, equities and derivatives. VaR can be used to communicate risk and to control risk by setting limits for frontline traders and operating managers. Pros and cons of using......

Words: 2124 - Pages: 9

Risk

...SECTION 4: ASSESSING RISK Risk assessment and management is one of the highest priorities for any organization to safeguard its properties and assets. In a turbulent state, all information and security vulnerabilities should be in a conversant to many regulations. Selected and tested methodologies have been defined and framed to mitigate the risk-assessment to many organizations. The frameworks have been set to help and guide security and risk. One of the methodologies is: Factor Analysis of Information Risk, abbreviated as (FAIR). FAIR is a methodology for understanding, analyzing and measuring information risk. Information policy and security practices have been inadequate available to aid in effectively managing information risk. For the little available information clues, managers and system owners have found it hard to make effective and well-informed decisions to safeguard their systems against such risks and uncertainties as they may happen. FAIR is elevated to address security practice weaknesses. The major aim of this methodology is to allow organizations contribute effort and mitigate the various risk as they may happen. In one accord risk is assessed and measures be taken to counter the menace. The method ensures the organizational risk is defended and or challenge risk determined by use of advanced analysis techniques and also understand how time and resources such as money will impact the organization's security profile in general. The Methodology works with...

Words: 926 - Pages: 4

@Risk

... Finance @RISK, MexDer, Overdose Student name: Viridiana Gpe. Garcia Casas ID: 1550991 Group: 8Vi Cd. Universitaria, San Nicolas de los Garza Nuevo León, february 7th 2016 Homework #1 @RISK @RISK is a program that helps companies or the CEO of a company to understand the risk that the company has making a risk analysis using the Monte Carlo Simulation –The MCS help us to see all the possible outcomes of decisions and assess the impact of risk allowing for better decision making. It is a computerized mathematical technique using quantitive analysis, substituting a range of value and giving a possibility distribution-. The system was created in 1987 by corporate Palisade, all Palisade software is incorporated into Microsoft Excel, ensuring flexibility, ease of use and wide appeal in a wide range of industry sectors. (Palisade was founded in 1984 and its first product was PRISM, which gave PC users the ability to quantify risk by running Monte Carlo simulations. In 1987 he was succeeded byRISK for Lotus 1-2-3, the first auxiliary Monte Carlo simulation program for spreadsheet.) The @RISK system works with RISKOptimizer that helps companies to know the inputs to use, and also to know the risk associated with each strategy. Companies can search for strategies that minimize risk while achieving goals (the RiskOptimizer also use the MCS). RISK Is used in many industries such as: insurance, oil, gas, energy,......

Words: 1163 - Pages: 5

Risk

...Possible risks: Project risks: Description & Possible mitigation strategies: • R&D, HR, group management team outstation support risk, Real time report and provide support services. • IT: Hardware & software compatible risk, IT technician will come on site to install the framework and provide training. • Share services support risk, set up new reporting group & new cost centre. (Being late, project being delivered late. Like family emergency or the project itself failing just as it was working out well. 2, Over budget. 3. Communication breakdown. 4. employee turnover. 5. Not knowing what’s Going On. 6. Team member Not fit for the Job. 7. Members Don’t know the project ..technology or information dealing with. 8. Dad environment. 9. Un-productivity. 10. User Commitment. Customer risks: Description & Possible mitigation strategies: It might occur sales resistance (existing custom might not shift to the new brand of bottler water). Mass advertisement to win confide/trust in new product. • dissatisfy the customer - by not fulfilling needs and/or expectations • satisfy the customer - by satisfying needs and meeting expectations • delight the customer - by exceeding their expectations in some way. In today's fiercely competitive business environment, customer loyalty is a key success factor. Transition risks: Description & Possible mitigation strategies: Business design risk, centralise / decentralise management, company......

Words: 350 - Pages: 2

Risk

... T Anatomy of Risk Management Practices in the Mortgage Industry: Lessons for the Future Clifford V. Rossi Anatomy of Risk Management Practices in the Mortgage Industry: Lessons for the Future Clifford V. Rossi Robert H. Smith School of Business University of Maryland May 2010 2 9946 Anatomy of Risk Management Practices in the Mortgage Industry: Lessons for the Future © Research Institute for Housing America May 2010. All rights reserved. Research Institute for Housing America Board of Trustees Chair Teresa Bryce, Esq. Radian Group Inc. Michael W. Young Cenlar FSB Nancee Mueller Wells Fargo Edward L. Hurley Avanath Capital Partners LLC Steve Graves Principal Real Estate Investors Dena Yocom IMortgage Staff Jay Brinkmann, Ph.D. Senior Vice President, Research and Business Development Chief Economist Mortgage Bankers Association Michael Fratantoni, Ph.D. Vice President, Research and Economics Mortgage Bankers Association Anatomy of Risk Management Practices in the Mortgage Industry: Lessons for the Future © Research Institute for Housing America May 2010. All rights reserved. 3 Table of Contents Executive Summary 1. Introduction: Findings and Recommendations 2. A Model for Mortgage Risk Taking: Growth, P / E and the Fallacy of ROE 3. Data and Model Limitations Data Integrity Economic Environment Mortgage Products and Risk Layering Borrower and Counterparty Behavior 4. Governance, Corporate Culture and Risk Taking: A......

Words: 6191 - Pages: 25